Slow recovery without falling interest rates
Chinese banks did not cut one-year and five-year loan concession rates (LPR) today, even though the economy still faces many challenges.
Unemployment is the main economic problem, as we expect the service sector to continue to be affected by limited flows of people during the summer holidays. Travelers still fear getting stranded if they travel, either because they may catch Covid themselves or become close contacts with positive cases. And while the manufacturing sector seems to have recovered, its growth comes mainly from the mining and processing of coal to ensure an adequate supply of electricity during the hot summer months. Other manufacturing activities remained weak in May.
Infrastructure benefited from the LPR cuts in May. But infrastructure alone cannot absorb all the unemployment.
The yuan was supported by no rate cut decision
USD/CNH gained support at around 6.710 following the decision to leave interest rates unchanged. We expect USD/CNY onshore to do the same.
Rate cuts are still happening
With the economic recovery weak, rate cuts in the coming months are still likely as we expect the economic recovery to be slow under the Covid-zero policy.
After this break in rates, the government should provide more fiscal stimulus, as monetary policy is now a secondary policy tool to support the economic recovery. Some local governments have stepped up their fiscal stimulus efforts by selling off assets, indicating that local government debt could once again become a hot topic.